In business, there are generally two types of operating expenses which are incurred; fixed or overhead costs and variable costs.
Fixed costs are those which have to be paid, regardless of whether the business is operating or not, such as rent, administrative expenses, etc. Conversely, variable costs are those associated with the operations of the business that increase with volume, such as commissions to salespeople, input costs, wages, etc.
The Aim is to Maximize Profit
Profit, of course, is the difference between the revenue streams and costs, both fixed and variable and break-even is the point where revenue equates costs. Therefore, one way to improve profitability is to bring the break-even point down. Naturally, business revenue targets increase year on year and with that so does the cost of doing business or variable costs. Thus, businesses must seek ways to reduce or control the fixed costs or overheads.
To reduce the break-even point, several strategies may be adopted. One easy fix can be to outsource processes that add to administrative expenses. An example may be payroll or tax computation for a small to medium-sized business. A trend observed nowadays is to outsource specialized tasks or use the “Gig Economy”. Many mid-sized businesses that cannot afford to hire top-rated executives can employ their services by hiring them for specific projects, thereby curtailing the salary bill. Similarly, the same principle can be employed for machinery or cars, and the like. Instead of investing in a piece of expensive equipment, such as a forklift, it can be hired for a single project only. This way businesses do not suffer storage and maintenance costs.
Another popular method that is now accessible to many mid-sized businesses, is the development of an app. Apps are no longer big budget items for businesses and can prove to be an important tool in overheads reduction as well as increase business outreach thereby making customer access easier, reducing costs and increasing revenue. Companies who develop apps for businesses provide for features, such as updates and options for advertisements and all this can be easily done within the
According to Tony Gattari of the Achievers Group, businesses should try to move more and more fixed costs to variable costs. For example, pay people for performance and output, thus maximizing efficiency.
Some other very important options to consider are improving work processes, making them efficient and cost-effective, purchasing equipment that is faster and consumes less energy, saving waste by moving to a paperless state and digitization. It has been observed that by creating comfortable management practices, the output can be improved. Consider using target-based methods that enable employees to work out of their homes and monitor their deliverables. This allows work to be completed without bearing the cost of employees using office premises.
Modern-day connectivity tools, such as emails, web dialing, conference calls, smartphones, data analytics, and information technology have opened up huge options
that businesses can utilize in cost management and improving profit and reducing your business’ operating expense.
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